Do multi-asset funds help navigate market uncertainty?

Volatility in the market is inevitable. Be it a financial crisis, a global pandemic or like most recently, political unrest. There will always be some or the other uncertainty in the country or the world which can lead to market volatility. Does this mean you should stay away from investing in the markets entirely? Certainly not. So, how can this volatility be well-navigated?

It is said, ‘You don’t drown by falling in the water. You drown by staying there’ A handy lifejacket or a trusted lifeguard is all that you need!

Multi-asset funds can be the life-jacket for your portfolio.

Let’s first understand - market volatility affects different investments differently

Investable assets are of different types – from equity to debt and currencies to commodities. Each asset class has different features and more importantly responds differently in different economic conditions. A single asset class thus like the market and economy, tends to go through periods of upswings and downswings in performance.

In fact, asset classes tend to have low correlation with each other – for example when equity markets plunge due to uncertainty; gold does well, being a safe haven investment. Similarly, equity is touted as a high reward- high risk asset, while debt tends to provide the relative stability of fixed income.

This balancing act between asset types can make a multi-asset investment strategy better than a single asset one, from a risk management perspective.

How can you strike this balance as an investor?

Just as the economic situation keeps changing, ideally so should your portfolio allocation. Switching between asset types in response to market changes. However, this can be difficult to do at investor level for want of expertise, high transactional costs and the need for constant market and portfolio tracking.
Multi-asset mutual funds take over this job for you!

A better way to manage volatility – multi-asset funds

Multi-asset funds are a separate category of mutual funds as mandated by SEBI. They invest in at least 3 different asset classes, with a minimum of 10% allocation to each. These can include equity, debt, index funds, financial derivatives as well as commodities like gold etc.

Touted as ‘all-weather’ funds, these funds seek to earn reasonable capital appreciation while balancing overall risks - all in all to give you better risk-adjusted returns.

How does it navigate market uncertainty?

• Through better diversification
  Multi-asset funds combine the growth potential of equity, stability of fixed-income debt and safety and security of gold. This makes your portfolio multi-faceted, balancing risk and returns through all market cycles.

• Through regular portfolio rebalancing
  Beyond the mandatory 10% allocation, fund managers can freely allocate across the asset classes – switching from underperforming to outperforming asset classes. This means they can increase allocation to equity in high growth phases; decreasing it in highly volatile times switching to less risky debt or gold and vice versa.

• Through fund manager expertise
  Understanding the changes in economy and market requires a fair amount of expert knowledge and experience. Multi-asset funds have competent and expert fund managers who study the markets and make informed asset allocation decisions.

To find deep treasures you need to enter deep waters so put on your metaphoric lifejacket and seek out multi-asset allocation funds to navigate market uncertainty without compromising too much on growth potential.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.